A recent article in The Wall Street Journal profiles the CEO of Alpha Architect LLC, an upstart active investment manager. The firm currently advises five exchange-traded products (ETPs). Four of these ETPs have a sufficiently long history to be analyzed using Alpholio™’s patented methodology.

All of the following analyses employ the simplest variant of the methodology. For each analyzed ETP, the variant constructs a reference portfolio of up to six ETFs that most closely tracks periodic returns of the ETP. Both the membership and weights of ETFs in the reference portfolio are fixed over the entire analysis period.

The ETP produced a significantly lower cumulative return than that of its reference ETF portfolio. It also had a higher volatility due to a relatively small number of deep-value holdings. This was also reflected in a considerably elevated RealBeta™, assessed against a broad-based domestic equity ETF.

The following chart with statistics shows the fixed composition of the reference ETF portfolio for QVAL:

The ETP added significantly more value than its reference ETF portfolio, but only beginning in the second half of last year. This is why the article singles out a recent outperformance of just this product:

…value-focused fund of overseas stocks is beating all its rivals over the past year.

The ETP produced this excess return at the expense of a substantially higher volatility than that of its reference ETF portfolio.

The following chart with associated statistics illustrates the static composition of the reference ETF portfolio for IVAL:

It should be noted that all of the above ETPs except for QVAL have traded at a considerable premium to their net asset value (NAV). For example, as of this writing, IMOM’s one-year price return was 8.50% compared to a 3.10% NAV return. Such pricing discrepancies could partially explain the presence of REM (a domestic real-estate fund) and IHI (a domestic medical device fund), in the reference ETF portfolio for IMOM.

In sum, the majority of Alpha Architect ETPs have so far delivered unimpressive results after a comprehensive adjustment for volatility and exposures. Since the oldest product has less than three years of history, only time will tell whether the performance of these ETPs vs. their reference ETF portfolios will eventually improve. The challenge of any factor investing, including value and momentum, is not only the cyclical variation of performance but also the selection of individual securities to implement the factor.

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